SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF a Plan of Compromise and Arrangement of Clothing for Modern Times Ltd.

BEFORE: D. M. Brown J.

COUNSEL:
M. Poliak, for the Applicant

M. Forte, for A. Farber & Partners Inc., the Monitor

I. Aversa, for Roynat Asset Finance

D. Bish, for Cadillac Fairview

L. Galessiere, for Ivanhoe Cambridge Inc., Oxford Properties Group Inc., Primaris Retail Estate Investment Trust, Morguard Investment Limited and 20 VIC Management Inc.

M. Lerner, for Mr. Arif Noor

HEARD: February 17, 2012

REASONS FOR DECISION

I. Motions for approval of stay and extension of stay under the CCAA

[ 1 ] By Initial Order made December 16, 2011 this Court permitted Clothing for Modern Times Ltd. (“CMT”), a retailer of fashion apparel, to continue its restructuring proceeding under the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36 and authorized a process for the sale of the company’s Costa Blanca business.

[ 2 ] The Monitor, A. Farber & Partners Inc., moves for the approval of a proposed asset sale agreement dated January 16, 2012 (the “Proposed Sale Agreement”) between CMT and 2313329 Ontario Inc. CMT moves for an order extending the stay of proceedings until March 27, 2012 and approving the liquidation of inventory and fixtures in eight Costa Blanca stores which are not subject to the Proposed Sale Agreement, together with certain other relief.

II. Monitor’s motion to approve the Proposed Sale Agreement

[ 3 ] The Monitor conducted a sales process as described in its Second Report. At the end of the day the Monitor received five offers, three of which were from liquidators. Of the two going concern offers, the one from 2313329 Ontario Inc. offered the highest consideration, albeit in the form of a credit bid using a significant portion of the secured debt of CIC and CMT Sourcing in the company. The proposed purchaser, 2313329 Ontario Inc., is a related person to CMT. Mr. Arif Noor is the principal shareholder of CMT, as well as of 2313329 Ontario; he also is a 50% shareholder in CMT Sourcing.

[ 4 ] Prior to the start of the sale process Mr. Noor had indicated his interest in submitting an offer. As a result, the sale process was administered by the Monitor, not by CMT.

[ 5 ] No party opposed the approval of the Proposed Sale Agreement, although the landlords of a large number of the premises at which CMT stores are located voiced some concerns. I will address those concerns shortly.

[ 6 ] The proposed sale must be assessed in light of the criteria contained in sections 36(3) and (4) of the CCAA . I am satisfied that the Proposed Sale Agreement meets all of those criteria. The evidence shows that the Monitor administered the sale process in a fair and transparent manner, in conformity with the requirements of this Court’s order of December 16, 2011, and in consultation with creditors. The Monitor supports the sale, and it reported that the sale of the assets in the proposed transaction would be more beneficial to the creditors of CMT than a sale or disposition in the context of a bankruptcy. The reality of the financial situation of CMT is that the effect of the proposed sale will result in a shortfall to one of the secured creditors of CMT.

[ 7 ] The Monitor submitted, on a confidential basis, a chart comparing the anticipated net proceeds from the main offers. There can be no doubt that the Proposed Sale Agreement offers the most superior consideration. In addition, as a term of the Proposed Sale Agreement one of the secured creditors, CIC, has agreed to provide funding to satisfy all priority payable obligations to employees pursuant to sections 81.3 and 81.4 of the BIA .

[ 8 ] Finally, I am satisfied that the Monitor made good faith efforts to sell or otherwise dispose of the assets to persons who were not related to CMT. I approve the Proposed Sale Agreement, subject to one condition.

[ 9 ] The Proposed Sale Agreement contains a provision (s. 2.7) allowing the purchaser to exclude any of the assets from the transaction prior to closing, which could enable the purchaser to take fewer leases for retail stores than initially contemplated. Indeed the purchaser has made some rumblings to that effect in recent days. Further, section 4.1(c) of the Proposed Sale Agreement makes it a condition of closing in favour of the purchaser that “all consents necessary to the assignment to the Purchaser of Premises Leases shall have been obtained or an Order(s) of the Court shall have been obtained authorizing such assignments”. Finally, the Proposed Sale Agreement defines “closing date” as “the Business Day following the date on which the Vesting Order is granted or such other date as agreed to in writing by the parties hereto”.

[ 10 ] The concerns voiced by the landlords during the hearing related, at least to my ear, to the uncertainties surrounding the purchaser’s intentions with respect to the Costa Blanca stores covered by the Proposed Sale Agreement and certain difficulties which had surfaced in the negotiations for the consents to assignment of retail store leases. Those are all business matters which the parties must work out. The Monitor presented a revised order which included some provisions sought by the landlords. I am prepared to grant the relief sought in paragraphs 4 and at the end of paragraph 6 of the draft order because those provisions simply indicate that the fact of court approval of the sale is a neutral factor not affecting the substance of the negotiations which must occur between the purchaser and the landlords. I am not prepared to grant the relief sought by the landlords in paragraph 14 of the revised draft as that would amount to an amendment to the Proposed Sale Agreement and, more importantly, an amendment obviously made in the heat of the motion, rather than as part of a more reflective negotiating process.

[ 11 ] That said, I am not prepared to approve the “open-ended” closing date contained in the Proposed Sale Agreement. Either the purchaser can quickly strike deals with the landlords or, quite frankly, I expect the company will be looking at a Plan B for its reorganization. Accordingly, while I grant the motion of the Monitor and approve the Proposed Sale Agreement, I do so on condition that if the Proposed Sale Agreement has not closed by March 15, 2012, the company and Monitor must re-apply to Court for further directions on the re-organization of CMT’s business. I hope that by imposing such a deadline the parties can work towards a successful completion of the Proposed Sale Agreement.

[ 12 ] A sealing order shall issue in respect of Confidential Appendices “A”, “B” and “C” to the Monitor’s Second Report.

III. CMT’s motion to extend the stay

[ 13 ] CMT moves for an order extending the stay of proceedings until March 27, 2012 to enable it to liquidate the inventory and fixtures in some Costa Blanca stores which are not part of the Proposed Sale Agreement. As well, CMT seeks to extend the KERP plan approved in the July 11, 2011 Order and seeks approval of the repayment in full of its loans from Roynat Asset Finance.

[ 14 ] In its supplemental report the Monitor stated that it was satisfied that CMT was acting in good faith and with due diligence in the conclusion of the Proposed Sale Agreement and liquidation of inventory and otherwise supported the relief sought by CMT. No party opposed the extension request.

[ 15 ] Upon reviewing the evidence filed by CMT and the Monitor’s supplementary report I am satisfied that the company has acted, and is acting, in good faith and with due diligence and I grant the requested extension. Continuation of the KERP at the stores in question will assist in the liquidation of the inventory and fixtures, and the proposed liquidation of certain stores is reasonable, especially given that CMT has agreed to follow the liquidation guidelines set out in the July 22, 2011 order.

[ 16 ] In light of the evidence about the priority of the Roynat security, the declaration sought by CMT in respect of the repayment of the Roynat loans is reasonable.

[ 17 ] Accordingly, I grant CMT’s motion.

IV. Order granted

[ 18 ] I have placed my fiat on a marked-up version of the draft order submitted by the Monitor, and I have signed the draft order submitted by CMT for its motion. Counsel may pick up the orders from Courtroom 8-6, 330 University at 9:30 a.m. any day next week.

D. M. Brown J.

Date : February 17, 2012